A Bank With Strong Ethnic Ties

The Pasadena, Calif.-based regional bank, with $20 billion in assets, was hit hard early on in the downturn, but has since done an excellent job of refocusing and cleaning up its balance sheet, so much so that it's completed two favorable Federal Deposit Insurance Corp.-assisted acquisitions in the past year.

At a Glance

East West Bancorp (EWBC)

Stock Price:

$16.49

52-Week High:

$20.55

52-Week Low:

$8.05

Market Cap:

$2.45 billion

Est. 2010 EPS:

78 cents per share

2010 P/E:

12.2 times

Est. Long-Term EPS Growth:*

34.00%

Est. ('11/'10) EPS Growth:

64.10%

Revenue (trailing 12 months):

$348.4 million

Dividend Yield:

0.20%

CEO:

Dominic Ng

Headquarters:

Pasadena, Calif.

* Based on analyst estimates looking ahead three to five years.

Sources: Morningstar, Thomson Reuters, Barron's

With a low stock valuation, plenty of room for growth, and a focus on the reliable Chinese-American market in California, East West shares should see continued gains.

The stock trades at just 12 times forward earnings, despite having profit margins above 70% and a long-term growth rate of 34%, almost quadruple the industry average.

East West stands out from its peers, according to Keefe, Bruyette & Woods analyst Julianna Balicka, as it is "the only Chinese-American bank to make money in the second quarter of 2010 and the first Asian-American bank to return to sustainable profitability."

The bank faltered briefly in late 2007 and early 2008, as its Southern California base was one of the first to feel the effects of the downturn. However, it righted itself quickly, and its shares have outperformed both the Dow Jones U.S. Banks Index and the overall market year-to-date, as well as in the past one- and two-year periods.

Yet the stock has retreated slightly in the past few months, creating an attractive entry point.

Ragen Steinke, portfolio manager of the WHG SMidCap Fund, notes that his firm recently purchased the shares given the bank's strength and favorable acquisitions.

Steinke says that East West effectively doubled its assets in an FDIC-assisted purchase of United Commercial Bank, a subsidiary of UCBH Holdings, allowing the bank to dramatically increase its earnings power with minimal risk.

In addition, he says, even though the bank has been "very aggressive in charging off loans (i.e., being a conservative operator), their balance sheet remains solid. East West holds up well under the stress test analysis we apply to the balance sheet, and is cheap on a normalized earnings basis."

East West purchased United Commercial in November, and in June made a second FDIC-backed purchase of Washington First International Bank.

Currently the Chinese-American market accounts for about 60% of East-West's business. Tim Holland, portfolio manager of the Aston/Tamro Small Cap Fund, says that he likes how United Commercial, which focused on the Chinese market in Northern California, complements the company's business.

East West now has a firm hold on serving the Chinese communities in both halves of the state, and may also save money by consolidating overlapping branches.

"East West [also] has a physical presence in China," says Holland. "If you think about where the economic growth is and where a tremendous amount of wealth is being generated, it is on the mainland and in Taiwan, so that's a nice footprint to have as well."

Sterne, Agee & Leach analyst Brett Rabatin believes that the two acquisitions "have been extremely positive to net income," but that loss-share accounting related to the deals has been obscuring the company's organic earnings at East West, which may explain why the market hasn't been giving the stock its due recently.

The company's most recent quarter, reported at the end of July, surprised on the upside, as core deposits and earnings grew, and net charge-offs fell.

Going forward, East West "is well positioned for future growth in multiple domestic markets as well as China [and] excess capital will allow the company to repay TARP later this year," notes Howe Barnes Hoefer & Arnett analyst Don Worthington.

KBW's Balicka also sees several other catalysts for the stock as well, including higher retention of assets it received through the FDIC buyouts, whose losses are covered by the government (as the outflow of assets has been high), and the likelihood that the bank's commercial real-estate portfolio will outperform.

"Given the fact that East West is integrating two large, complementary franchises, the bank could potentially perform at an 'A+' level….Most banks right now don't even have this opportunity," Balicka says. "East West is adding on incremental growth but jumping up from a transformational deal. Even if it performs at a 'B' level, a 'B' from East West will be on the level of an 'A' from a bank without such transformational positioning."

Of course, no stock is without risks. East West has to digest both of the acquisitions it made in the past year successfully, and it would also be hurt if California home prices fell off significantly, given its loan portfolio. In addition, like all banks, it is not immune to macroeconomic conditions, such as a slowdown in the recovery.

Still, East West has made a remarkable turnaround from the beginning of the recession, and now has a strong balance sheet and an enviable geographic hold on the West Coast and abroad, bolstered by low-risk FDIC-aided acquisitions.

Those are advantages investors can bank on.

Full Disclosure

•Howe Barnes Hoefer & Arnett analyst Don Worthington has a Buy rating and a $21 price target on East West Bancorp.

•Keefe, Bruyette & Woods analyst Julianna Balicka has a Buy rating and $19 price target on East West Bancorp.

•Sterne, Agee & Leach analyst Brett Rabatin has a Buy rating and $21 price target on East West Bancorp.

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